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Combination notes: market segmentation and equity transfer

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  • Schaber, Albert

Abstract

This paper empirically analyzes a particular type of notes observed in securitization transactions: combination notes. Combination notes are formed by combining parts of two or more tranches of securitization transactions, where one part usually consists of a share of the first loss piece. It is analyzed whether combination notes are purely demand driven, or whether combination notes also appear to be structured to enable equity transfer. Results indicate that combination notes serve both purposes: market segmentation severely determines the structuring of combination notes, but risk transfer needs seem to be catered by combination notes as well. Further, an analysis of launch spreads indicates, that the observed equity transfer via combination notes has an impact on the pricing of the ordinary tranches of each deal. This paper makes use of unique data on 126 deals containing 1385 tranches, thereof 398 combination notes.

Suggested Citation

  • Schaber, Albert, 2008. "Combination notes: market segmentation and equity transfer," Discussion Papers in Business Administration 7956, University of Munich, Munich School of Management.
  • Handle: RePEc:lmu:msmdpa:7956
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    File URL: https://epub.ub.uni-muenchen.de/7956/2/Schaber_combination_notes_Dec08.pdf
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    References listed on IDEAS

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    1. Boot, Arnoud W A & Thakor, Anjan V, 1993. " Security Design," Journal of Finance, American Finance Association, vol. 48(4), pages 1349-1378, September.
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    3. John Y. Campbell & Glen B. Taksler, 2003. "Equity Volatility and Corporate Bond Yields," Journal of Finance, American Finance Association, vol. 58(6), pages 2321-2350, December.
    4. Scheicher, Martin, 2008. "How has CDO market pricing changed during the turmoil? Evidence from CDS index tranches," Working Paper Series 910, European Central Bank.
    5. Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, February.
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    7. Gorton, Gary B. & Pennacchi, George G., 1995. "Banks and loan sales Marketing nonmarketable assets," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 389-411, June.
    8. Papke, Leslie E & Wooldridge, Jeffrey M, 1996. "Econometric Methods for Fractional Response Variables with an Application to 401(K) Plan Participation Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 619-632, Nov.-Dec..
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    Cited by:

    1. Gann, Philipp, 2009. "Liquidit├Ąt, Risikoeinstellung des Kapitalmarktes und Konjunkturerwartung als Preisdeterminanten von Collateralized Debt Obligations (CDOs) - Eine simulationsgest├╝tzte Analyse," Discussion Papers in Business Administration 10582, University of Munich, Munich School of Management.

    More about this item

    Keywords

    combination note; first loss piece; securitization; collateralized debt obligation; security design;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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